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The Truth About Venture Capital

Myth: Getting venture capital is impossible. Reality: It's not easy, but it can be done. We show you how.

Some entrepreneurs beat the bushes in search of venture capital. Some pound the pavement. Others look high and low. Still others search with a fine-toothed comb or cover all the bases. Then there's Mark Fletcher, who did none of the above. (He avoids idioms.) Fletcher--chairman and vice president of technology for eGroups Inc., a free e-mail community service that allows Internet users to connect around common interests--sat back and let venture capitalists come to him. Well, maybe he didn't just sit back.

"We started working on eGroups [formerly ONElist] in August '97 and went online in January '98," recalls Fletcher. After nine months running the new business evenings and weekends while working full time, "we got calls from [venture capital firms] CMGI and Bertelsmann Ventures saying they had gotten together and were interested in investing in us. The Tuesday before Thanksgiving [1998], they called to set up a meeting the following day. We got the terms of the offer the day after Thanksgiving, and on Monday we signed a term sheet." In less than a week, the 29-year-old entrepreneur had arranged for a $4 million investment in his start-up.

Does Fletcher advise other entrepreneurs to wait for VCs to approach them? "No," he says emphatically. "My philosophy creating the company was: Let's get the service up and prove ourselves first. By Thanksgiving [1998] we were approaching a million users, so we could go in and say, `Here's what we have; here's how it works; it's a proven commodity.'"

Fletcher's experience would seem to perpetuate the myth that there is an abundance of venture capitalists in search of needy entrepreneurs. Fact is, there's more funding than ever, but there's no shortage of would-be takers. Tens of thousands of companies are unable to arrange any financing. Based on a PricewaterhouseCoopers Money Tree national survey, of the estimated $20 billion in VC funds invested in 1999, more than 90 percent went to tech ventures (including biotech, communications, computers, software and Net-based companies).

Does that confirm the myth that only high-tech companies qualify for venture capital? No, says John Martinson, chair of the National Venture Capital Association, the industry trade group. "There's certainly a segment [of the VC industry] that invests in consumer and low-tech companies--maybe not restaurants, but restaurant chains, for example," says Martinson, who also is managing partner of Edison Venture Fund in Lawrenceville, New Jersey. His member firms look to build sizeable companies that can command a premium value, either in an IPO or upon sale to a larger company--"companies that can be $100 million in annual revenues in three to five years," he explains. In today's market, that usually means technology companies.

But Dee Powers thinks there's more money available now for nontech firms. "Most VCs are mesmerized by the dot.coms," observes the cofounder of Profit Dynamics Inc., a research and consulting firm in Phoenix. "[But] since last summer, they've begun returning to quality and value investments, looking at management and markets. Entrepreneurs still have to look harder for nontech capital, but it's there."

To find it, Powers recommends checking the library for Pratt's Guide to Venture Capital. Or try VC directories, then call firms directly and ask for their requirements. While your best path to capital is a referral from your accountant or attorney, another option is searching the Internet. A Lycos Web search found 30 VCs seeking queries from nontech businesses.

Another prevalent myth: Venture capital is available only if your company needs millions of dollars. High-tech start-up veteran Neal O'Farrell agrees: "[As a high-tech entrepreneur,] unless you're looking for $4 million or more, forget venture capital. Of course, that's a generalization." In reality, the generalization is contradicted by the experiences of countless entrepreneurs and diminished by the formation of more and more small venture capital firms and Internet portals targeting start-ups needing smaller amounts.

As managing editor of Bottom Up (www.bottom-up.com) in Cincinnati, O'Farrell helps match start-ups with investors. His e-zine connects compatible parties while providing entrepreneurs with news, information, a panel of high-tech consultants and more. O'Farrell, author of Stepping Into Magic: A Handbook for the High Tech Start-up (Pylon Books, $24.95, 513-677-6749), has seen "tens of thousands of great ideas that won't make it because they aren't big enough. They might do $50 million [in sales], but that's not enough for VCs." His goal at Bottom Up is to help fill the funding gap for start-ups that don't yet appeal to the VC community.

Apple Computer's former chief evangelist, Guy Kawasaki, is eyeing a comparable niche: the gap above friends and family and below Sand Hill Road. Kawasaki's third and latest start-up, Garage.com, in Palo Alto, California, is intended "to help guys and gals in a garage find seed capital ranging from $4 million to $1 million," he says.

The Web site (www.garage.com) has a two-stage submission process. The first stage asks for a three page "executive summary" (who you are and what you want). The second stage is a detailed 10-page amplification. The best prospects are directed to a group of VCs and angel investors to exchange one-to-one e-mails. In the first nine months of 1999, Garage.com helped 20 start-ups raise more than $60 million.


Contributing writer Paul DeCeglie writes our monthly "Money" column.

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This article was originally published in the February 2000 print edition of Entrepreneur with the headline: The Truth About Venture Capital.

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